Claudio de Moura Castro is former Education Advisor and Chief of the Education Unit, Sustainable Development Department. Laurence Wolff is a consultant with the Education Unit. The
authors wish to thank Henry Levin, Pedro Gonzalez, Jeffrey Puryear, Juan Carlos Navarro, and
Jaime Vargas for their thoughtful comments on an earlier version of this paper.
The opinions expressed herein are those of the authors and do not necessarily reflect the official
position of the Inter-American Development Bank.
August 2001
This publication (No. EDU-119) can be obtained through:
Publications, Education Unit
Inter-American Development Bank
1300 New York Avenue, N.W.
Washington, D.C. 20577
E-mail:
sds/edu@iadb.org
Fax:
202-623-1558
Web site:
www.iadb.org/sds/edu

Foreword

This paper is important because it seeks to enlighten a complex and often polemical debate
about public and private education. It argues that the distinction between private and public is
less important than the rules of the game to which critical actors of the system respond. Based
on a review of a wide range of literature, the paper argues for public policies which can make
public institutions more market oriented and private institutions more likely to serve the public
interest, including providing systematic information on learning, giving increased power to students, parents, and other stakeholders involved in public education, providing more effective
oversight of private schools, and establishing funding mechanisms for both public and private
education which encourage quality, efficiency, and equity.
Juan Carlos Navarro
Acting Chief
Education Unit
Sustainable Development Department

Contents

The Nature of the Debate
between the Public and Private Sectors
1
Encouraging Market-Driven Public Schools
7
Encouraging Private Schools
to Serve Public Objectives
14
Postscript: Public or Private,
a False Question
21
Bibliography
22

The Nature of the Debate between
the Public and Private Sectors
reasoning is that private institutions would go
out of business if they did not meet the needs of
paying customers. Private school advocates argue that the public bureaucracy, of which public
schools are a part, does not serve the client but
serves itself, politicians, bureaucrats, or teachers.
Moreover, supporters hold that private schools
are much more concerned with results, such as
scores on tests, retention in schools, employment, or acceptance into the next level of
schooling. In addition, they claim that teacher
tenure ensures that bad teachers continue to
teach because they cannot be let go. They go on
to contend that because public education is politicized, teachers’ unions are likely to go on
strike for political reasons, harming students by
reducing their classroom time. Finally, many
private providers, especially those with a religious affiliation, maintain that they are able to
instill in their students stronger ethical and
community values than the public schools. Private providers also make the point that they are
well aware of equity issues and many provide
scholarships or loans for needy students.

THE PURPOSE OF THIS PAPER
The polemical battle between those who support
private education and those who support public
education plays itself out in Latin America as in
many other parts of the world. Public education
supporters begin by arguing that public education, especially at the primary and secondary
levels, is a right of the people and that providing
it is an obligation of the state. Nearly every
Latin American constitution includes a clause to
the effect that the government guarantees every
citizen a basic education. Public school supporters argue that the state cannot abandon this obligation through “privatization.” They assert that
private education replaces public values with
private ones, leading to a breakdown in the sense
of community and the rich who attend private
schools often have little or no contact with the
poor, leading to a loss of shared values. As a
result, the middle class loses interest in public
education and the proportion of the national
budget devoted to public schools decreases,
further depressing quality. Private schools increase social stratification as private schools
“skim” the best students as well as the best
teachers (by offering them better salaries,
working conditions, or both), leaving the public
system to serve the poor and underprivileged.
Finally, public school adherents argue that private schools often enjoy a semi-monopoly and
are therefore able to charge outrageous amounts
for tuition and make windfall profits. Worse,
some of the private schools are fraudulent and
provide students with diplomas devoid of learning.

While private providers maintain that they are
more efficient, they resent the unfair competition
of free or highly subsidized public education. As
a result, they usually lobby for subsidies or government support. In some cases they ask for
nearly full reimbursement of costs because they
serve a social good. In other cases they ask for
partial direct subsidies. In still other cases, especially at the higher education level, they ask that
the government charge tuition in public institutions so that they can compete on a more even
footing. In addition, private institutions of higher
education may ask the government to provide
and subsidize student loans or to fund research
projects. Private providers also believe that government interference (such as red tape or price

For their part, private school adherents argue
that private education is inherently more efficient than the public alternative because they
have better administration and seek the most
cost-effective combination of inputs. The line of
1

controls) has a negative impact on their activ ities.

cohort attending preschool varies from ages 0 to
5 to ages 4 to 6. Private enrollment is relatively
high at the preschool level because most countries (with the exception of Cuba) do not consider that the government has a legal or constitutional obligation to provide preschool services.
It is more than likely that middle- and upperincome parents seek private pre-schooling for
their children because they are aware of the importance of early childhood development, they
value the freedom of not having children at
home part of the day, and they have the wherewithal to do so. A number of governments (e.g.,
Peru, Bolivia) support early childhood programs
for the poor that, in many cases, are provided
through NGOs. There are also a number of private/NGO programs aimed at the poor but there
is little systematic information available on their
impact and magnitude.

All of the assertions from both camps have some
truth to them. But the clash between those seeking to privatize and those seeking to nationalize
has dragged on for too long. This paper seeks to
enlighten the public/private debate in education.
The fundamental argument is that the distinction
between private and public is less important than
the perceived public good of each type of institutions and the rules of the game to which critical actors respond. The paper begins with a review of the relative importance of each, as
measured by enrollments and expenditures, and
then reviews the literature on the relative merits
of private vis-Ă -vis public education. The paper
continues with an examination of behavior in
public and private institutions and then identifies
government actions that could make public
schools more client oriented and market driven
and make private schools more socially oriented.
It concludes with an examination of the various
options for government support of private education. The paper calls for increased participation of civil society, systematic and transparent
assessments, new management schemes, and
new funding mechanisms for both public and
private education; and argues that, to improve,
both public and private education require clear
and coherent standards, the means to achieve
those standards, and feedback on how well they
are doing.

Only 16 percent of total enrollment in primary
schools takes place in private institutions. There
are several factors that may account for the relatively low percentage of total primary enrollment in private schools. First, governments accept responsibility for universal enrollment in
this level of schooling. Second, poor students are
more likely to attend public schools for lack of
resources to pay private school tuition. Third,
since primary schools draw from the local
population, their students tend to be more homogeneous. As a result, middle- and upperincome parents are able to find higher quality
public schools in their own neighborhood. Finally, there is a relatively high consensus on the
content and objectives of primary education (basic literacy and numeracy); therefore, parents
and students are less likely to seek alternatives.

WHO EDUCATES LATIN AMERICANS?
Table 1 shows public and private enrollments by
country and by level (up to secondary) in 1990
and 1996 as well as higher education enrollments in 1994. It should be noted that the data
are incomplete for a number of countries and
that UNESCO does not normally collect public
and private enrollment figures for higher education.

Interestingly, the two largest countries, Brazil
(11 percent) and Mexico (6 percent), have the
lowest percentage of primary students enrolled
in private schools. As might be expected, Chileâ&#x20AC;&#x2122;s
policy of public financing for private education
means that a very high percentage of primary
school students (45 percent) are enrolled in pr ivate schools. A large percentage of Haitian pr imary school students (61 percent) are also enrolled in private institutions; however, this is a
result of internal political conflicts and the accompanying disintegration of public institutions.

At the pre-primary level, in most cases, the private sector reaches over 30 percent of the elig ible population. These data are very unreliable
and should be interpreted with caution because
some countries only report formal programs
while others also include informal programs in
their report. In addition, the definition of the age
2

Table 1: Private Enrollment as a Percentage of Total Enrollment
(by level of education)
Pre-Primary
Country

With the exception of Chile and Haiti, there appears to be a rough relationship between what
could be estimated as the percentage of â&#x20AC;&#x153;middle
classâ&#x20AC;? families and private school attendance at
the primary level.

dents may have already dropped out of school
altogether. In other words, at the secondary level
the numerator is larger and the denominator is
smaller, yielding a larger ratio of students enrolled in private schools. Another explanation
for the relative increase in enrollment in private
secondary schools is that government provision
may be inadequate. Perhaps as important, since
there is less consensus on what should be taught
at this level, some parents may be seeking a dif

Enrollment in private secondary schools is relatively higher (24 percent) than in private primary
institutions. At this level, it is more likely that
middle-income students are opting for the pr ivate sector. Moreover, many lower-income stu3

contracts with private agencies. For example, a
recent study found that parents contributed an
amount equivalent to 20 percent of the public
costs of primary education in Peru (World Bank,
1999). Fé y Alegría schools, common in several
countries, and enrolling a million students, are
privately run but almost entirely funded by the
state (Swope, et. al., 1999). On the other side,
for example, public universities often provide
training or consulting services to industry for
which they are fully reimbursed. Indeed, some
industries have provided direct support to public
institutions, particularly technical schools, that
are linked with their own workers. In some
cases, when bureaucratic restrictions prevent
direct private financing, public institutions have
created nonprofit autonomous foundations.

Enrollment in private institutions of tertiary education in Latin America in 1994 averaged 35
percent (nonweighted), the highest among regions in the world. On a weighted basis, private
tertiary education averages 38 percent, largely
due to high private enrollment ratios in Brazil
and Colombia (58 percent and 64 percent, respectively). There is anecdotal evidence that
private enrollments have increased more than
public enrollments since 1994. Private instit utions account for a wide range of programs at
this increasingly diversified level, especially at
the level of post-secondary courses which last
two or three years. In many cases, increased demand for higher education has not been met with
increased public support. Stagnant public support has, in turn, led to a decrease in the perceived quality of public tertiary education and to
increased private enrollment. Private distance
education institutions (from within and outside
the region) have recently begun to show an increasing interest in establishing programs or
“franchises” in various Latin American countries.

Overall expenditures in private education are
estimated at $13 billion per year in the region, as
summarized below:
Table 2: Estimated Public
and Private Expenditures, 1997
(millions of US dollars)
Public

It should be pointed out that the above enrollment figures do not include private short term
“cram” courses designed to prepare students for
higher education entrance exams (called cursinhos in Brazil and academias in Peru), which are
expanding throughout the region. Nor do they
include the many private for profit training programs, often in computer science or secretarial
skills, which generally do not appear in official
statistics.

The reality of the region’s schools shows that
increasingly there are few purely public or
purely private institutions. Most private schools
are subsidized in one way or another by the
state. These subsidies take the form of tax exemptions for nonprofit educational institutions,
student loans, competitive funding, direct subsidies, vouchers, and training or skills upgrading
for teachers. By the same token, nearly every
public institution (even those that are officially
and constitutionally free), receives some form of
private funding, ranging from student fees to
semi-voluntary parental contributions, to service

This does not exhaust the amount of private expenditure on education in the region, since there
are large numbers of private education and
training programs, including “cram” courses,
vocational training, and industry training, for
which there is very little information. In addition, parents and students expend a significant
amount of funds to attend public schools, to
cover elements such as textbooks, examination
fees, uniforms, and gifts through PTAs through
4

schools. Assuming $50 per year spent on public
primary and secondary schools and $100 on
public tertiary schools, the private expenditure
on public schools could be as much as $5 billion. To complete the picture one would have to
subtract the amounts of public funding going to
private institutions. For example, the public subsidy of the one million students attending Fe y
AlegrĂ­a schools is estimated at over $250 million. Furthermore in countries such as Chile,
Peru, and Argentina, significant public funds are
allocated for direct subsidies of private institutions at all levels of education; and many countries also provide subsidized loans for students
to attend private tertiary instit utions.

measures of family background (i.e., the value
given by the parents to education) are included.
Finally, management elements such as the
school directorâ&#x20AC;&#x2122;s autonomy, vision, and leadership appear quite important as determinants of
learning and to a great extent appear to be a defining characteristic of many private schools.
But these characteristics are not necessarily and
exclusively the domain of private schools; examples of similar management characteristics
and high scoring students can be found in public
schools. A recent study of public and private
schooling in Chile and Argentina (McEwan,
2001) illustrates the complexity of the issue. According to the study Catholic schools were generally more effective than public schools in
terms of student achievement. However, private
non-religious schools in Chile had little advantages over public schools and in Argentina they
were only modestly more effective than public
schools. This could perhaps be explained by
their margin or profit-maximizing mission. This
study is consistent with U.S. studies showing
that Catholic schools are more cost-effective
than public schools (McEwan, 2000b).

THE COST EFFECTIVENESS OF
PUBLIC VS. PRIVATE SCHOOLS
The accumulated research does not provide a
definitive answer on the relative cost effectiveness of public vs. private education. This section
summarizes the results of those studies. 1
The literature shows that at the primary and secondary school levels private school students
throughout the Americas almost invariably perform better on standardized tests and other
measures of effectiveness such as school retention than those in public schools.2 (The exception is students in a few private schools run by
communities or entrepreneurs in rural or slum
areas where government is absent.) These differences diminish significantly (although they do
not disappear) after controlling for the socioeconomic status of private school students. The differences are further reduced when other factors
such as physical characteristics of the schools
(e.g., laboratories, libraries) and more subtle

Most but not all private institutions appear to be
able to keep their overhead and administrative
costs lower than public institutions, and therefore have lower unit costs, even keeping student
class ratios constant. If their outcomes are the
same or possibly better than public institutions,
then generally (but not always) they can be considered somewhat more cost-effective than public institutions. But even this advantage may
shift when the differences in service mix and
missions of public vs. private schools are taken
into account. If private schools faced some of
the mandated social missions of public schools,
such as educating handicapped or disruptive students, then their administrative costs could increase. Furthermore, this advantage could be
changed if public schools were freed from a variety of bureaucratic constraints.

1

See McEwan for the most recent overall review of
this question. See also the Occasional Paper Series
of the National Center for the Study of Privatization
in Education (NCSPE), at Columbia Teachers Co llege. Studies that examine this question in Latin
America include UNESCO/Orealc, 2000, McEwan
and Carnoy, 2000 (on Chile) and Mizala and Romaguera (on Chile and Bolivia).

Studies of learning at the tertiary level show
somewhat different results, since both public and
private institutions can be found at either extreme of the quality spectrum. A recent sta ndardized achievement test in Brazil showed wide
differences among students in both public and
private higher education institutions, even

2

This is not necessarily the case in cross-national
comparisons. For example, on average students in
private schools in Latin America score over one standard deviation lower on standardized tests than students in the public education system of Cuba
(Unesco/Orealc 2000).
5

though more of the best institutions (scoring
among the highest 12 percent) were public. At
the same time, private higher education instit utions generally have lower overhead and admin istration costs (and lower unit costs) than public
institutions. In Brazil and Venezuela, the unit
costs of public institutions can be as much as
five times higher than the costs of private institutions (Castro and Navarro, 1999). Therefore,
to the extent that the goals of both public and
private institutions are similar, it can safely be
said that private higher education institutions are
somewhat more cost-effective than public institutions.

lic sector provision of education. In the first
place public institutions will continue to have
missions which are more closely attuned to
broad social goals and public goods, while pr ivate institutions will continue to predominately
serve private needs. Furthermore, the cost advantage of privately run institutions declines as
the percentage of public financing increases,
especially for institutions which are not run by
charitable or church groups (McEwan and Carnoy, 2000). As the rest of this paper argues, the
best public policy is to encourage public instit utions to become market driven, thus increasing
their cost-effectiveness, and providing incentives
for private institutions to increasingly serve the
public good.

Nevertheless, relatively lower cost-effectiveness
is not an argument for the abandonment of pub-

6

Encouraging Market-Driven Public Schools
Public organizations have a more difficult time
in managing incentives because the threat of
“extinction” is much lower. They take longer to
correct errors (if at all) and to reward excellence.
They have difficulties in penalizing incompetence, lack of dedication and even unjustified
absences. For example, a number of public
authorities in Latin America have sought to put
in place systems to check teacher absenteeism
and penalize unjustified absences, but school
directors or faculty heads often refuse to supply
this information. A factory in which supervisors
are not allowed to check whether the workers
are at their jobs is unimaginable. Moreover,
public teacher’s unions often have a political
agenda that leads them to support a particular
political party rather than the economic agenda
of private sector unions.

BEHAVIOR IN PUBLIC SCHOOLS
People are not intrinsically different or driven by
differing or irreconcilable motives regardless of
whether they are employed in the private and
public sectors. As Hirschman (1970) argued
many years ago, humans act in ways that promote their own interest, whether they work in
the private or public sector. They seek to avoid
risks and excessive work where possible, to earn
and spend money, are tempted by power, guided
by certain ethical principles, and so on. However, the behavior of managers as well as workers will change depending on the work environment. If we earn more the more we sell and the
more we cut costs, then human nature will lead
us to focus efforts on selling and economizing. If
we earn more the better the quality of the services we provide, then we have good reasons to
put more effort into doing our job well. People
understand these signals and act accordingly.
Private organizations have learned to create carrots and sticks that capitalize on their employee’s self-interest. Not doing so would bring
dire results—reducing profits, generating losses
and, ultimately, leading to bankruptcy.

Trust in civic society and cultural considerations
play a significant role. Germany, France and
Japan have a long history of a high quality, responsive civil service. In these cases, civil servants are regularly and rigorously evaluated.
BUILDING A QUASI-MARKET
FOR PUBLIC SCHOOLS

The difference between the behavior of private
and public employees is not a result of incompetence but of incentives. Unless private schools
are protected by monopolies, bad habits and
poor performance will lead to disaster in the
same way that private business that operate at
higher costs than their competitors will eventually go bankrupt. In education as in other private
sector “businesses,” customers can “vote with
their feet” and exercise their right to exit the
market (Hirschman, 1970). Bankruptcy is a real
and tangible threat for private schools, a powerful factor in redressing management errors in
order to avoid tragedy.

Hirschman identified an alternative to a nonresponsive public sector—the “quasi-market.” In
this reformulation the public sector works partially like a market in that positive and negative
incentives are established that could eventually
lead to staff demotion or firing. A quasi-market
also gives those involved—students, parents
and/or employers—a voice in decision making
and an opportunity to “exit,” i.e., to take their
business elsewhere. The quasi-market also requires information to judge the quality of the
educational service offered as well as financial
and other incentives to reward effectiveness
(Hirschman, 1970). Interestingly both perverse

7

and positive signals can exist, often in the same
education system. 3

ing dropout rates; placement and/or performance
in the labor market (for secondary, vocational
and higher levels); finances, including per student and per graduate costs and private expenditures on public education; teacher remuneration; and staff qualifications.

There are several ways in which a quasi-market
for public institutions can be created. First, providing information on success and failure rates
to users, clienteles and other stakeholders and
clients. Second, rewarding and/or penalizing
those who are responsible for the success or
failure. Third, freeing public schools from public
regulation so that they are able to act, in effect,
like private schools. Fourth, giving power to the
consumer, in this case, students, parents, the
community and the productive sector. Fifth,
charging clients (at least partially) for the services provided to encourage them to demand better educational services. Given the unusual nature of the public education enterprise, the discussion that follows emphasizes the need for
constant tinkering with the rules to achieve these
goals. Furthermore, clear national education objectives and standards must be established and
made widely known in order to encourage market and client responsiveness.

For decades, there was little understanding in
Latin America of what was being learned in
schools. Unlike Europe, the countries of the region lacked national high stakes exams for
awarding secondary school diplomas. Moreover,
teachersâ&#x20AC;&#x2122; unions were adamantly opposed to
testing. The last ten years have seen a vast increase in testing for student achievement in
nearly every country and a greater concern with
using tests as de facto national standards. Universal testing makes it possible to find out which
schools are performing below standards and develop programs to improve them, as has been
done in Chile (see chapters on Chile in Reimers,
2000). Likewise, good performers, especially
when defined in terms of improvements over
previous scores (e.g., value added) can receive
recognition through financial rewards and other
rewards. Costa Rica has established exams as a
partial requirement for graduation from secondary school (Wolff, 1999). Even testing carried
out on a sample basis can yield useful information on the performance of regions or subregions. Reflecting the increased interest in
testing, Latin American countries are partic ipating more and more in international tests such
as those developed by the International Association of Educational Evaluation (IEA) and by
OECD. These tests show where a country stands
in relation to its competitors and are a useful tool
for setting de facto standards.

MARKET INFORMATION:
MEASURING ACHIEVEMENT
AND DESCRIBING
SCHOOL CHARACTERISTICS
One of the most important roles of the state (and
a condition of a healthy competitive environment) is to provide transparent, reliable, pertinent and timely information on both public and
private institutions. Information on the quality of
education can be obtained through testing, which
is a currently popular method. But information
on other indicators is equally important, includ-

Thus far, technical problems have slowed down
the utilization of tests and testing authorities
have devoted inadequate time and effort to their
dissemination and use; but progress in both areas
is being made. Parents and students now have a
tool to better recognize the best performing
schools and use this information to make their
choices.4

3

For example, until recently, Brazilâ&#x20AC;&#x2122;s federal higher
education system suffered from every possible perverse incentive; yet, the countryâ&#x20AC;&#x2122;s over one thousand
graduate programs are productive and perform well.
To a great extent the same civil servants who are
careless, irresponsible and lack dedication to their
undergraduate teaching tasks excel in doing research
and preparing other researchers and scholars. The
reason for this paradox lies in the fact that public
agencies finance research and fellowships on the basis of competitive, open, peer reviewed assessments
of research proposals, and a consistent system evaluates the quality of graduate schools providing additional funds to the better performing ones.

4

However, it should be pointed out that research in
North America suggests that parents pay the most
attention to socioeconomic status of other students in
the school rather than to school quality as measured
by testing (Willms).
8

There is a downside to testing, particularly when
it is used to reward or penalize schools. Teachers
can spend all their time preparing students for
the test or they can cheat by giving children
more time or prompting them for answers. In
addition, schools can be penalized for poor results but denied the resources to improve performance.5 In spite of these risks and potential
problems, good tests can measure higher order
skills, provide an important source of objective
consumer information, and serve as a criterion
for rewards or incentives for improved performance.

on individual teacher evaluations. As in the most
advanced service and manufacturing organizations, the product is the result of team effort, and
it is often the team (e.g., quality circle) that
should be rewarded. In the schooling context,
awarding the school encourages teachers to
work together for a common goal and also
smoothes out differences in student characteristics from year to year. Under this approach, the
school director becomes the critical staff member who is evaluated, an approach which is congruent with the research on the importance of
school based leadership. Beyond the individual
school, district or regional managers must also
be held responsible. This is increasingly the case
in the United States where school system superintendents establish explicit measurable goals
and are held responsible for achieving them.

The tradition of quality control from above does
not exist in Latin America. This type of quality
control is exemplified by the French inspecteur
who would visit schools to review practices and
teacher performance, arriving ex abrupto, sitting
through classes and taking notes. A bad report
card from an inspector could be a deadly blow to
one’s career. That tradition never really took
hold in Latin America where the school inspector was mainly concerned with bureaucratic
matters. The idea that a school principal would
formally and objectively evaluate the school
staff has also never taken hold. Of course,
school directors often informally identity nonperforming teachers and try to get them transferred.

The performance of teachers and administrators
should also be evaluated and, where appropriate,
rewarded. Unfortunately evaluation remains
very problematic in the region because it is
strongly opposed by many unions (it is, in fact, a
controversial issue throughout the world). In
principle, there are no good reasons not to conduct a proper evaluation of teachers’ performance. Also, in principle, education authorities
should have the right to inspect and evaluate
education workers. In the private sector, it would
be unthinkable for the boss not to be allowed to
evaluate workers and take appropriate actions.
Yet, quantitative performance evaluations of
teachers and schools have many pitfalls. First, it
is difficult to measure education’s product;
namely, an educated student. Secondly, it is difficult to compare a teacher’s performance from
one year to the next because the mix of students
in the classroom changes every year. Ideally,
teachers could be evaluated on the incremental
learning that takes place during the school year,
but this is a very complex and expensive undertaking. In any event, any statistical evaluation
must be combined with the personal evaluation
of the school director or supervisor. Finally, it
could be counterproductive to focus exclusively

In 1997, the Government of Bolivia announced,
among other policies, that it would begin to
evaluate teachers. The result of the policy announcement was a serious crisis that resulted in
the establishment of a state of siege for several
months. In 2000, Colombia’s Ministry of Education sought to test all teachers on their content
knowledge and proposed that teachers who did
not make the grade would lose their jobs. Opposition was so strong that it was never able to
carry out its plan. On the other hand, Mexico’s
teacher evaluation system, which can result in
salary increases if students improve their scores
over time, does not appear threatening and has
the support of the national teachers union
(PREAL, 2000).

5

Aware of these issues, the American Educational
Research Association recently promulgated a series
of recommendations for the appropriate use of high
stakes testing results. See AERA, Vol 29, No. 8.
9

In 1996, Chile established a National System for
Evaluation of the Performance of Supported
Educational Establishments (SNED), a program
that provides additional funds to schools whose
students score well on standardized tests. A
complicated scoring mechanism takes into account elements such as value added, equality of
opportunities, innovation and participation. Ten
percent of the funds awarded to top performing
schools are given to superior teachers identified
by the school. While a full evaluation of the
program has not yet been completed, it has been
reported that school directors like the program
and that teachers have become more accepting
of undergoing the evaluation process now that
the program’s incentives are in place (PREAL
2000, Mizala, et. al. 2000).

evaluate the performance of a principal if that
person lacks the resources with which to make
necessary improvements. However, with only a
few exceptions (e.g., El Salvador) this does not
extend to hiring and firing teachers or establishing their salaries. The combination of incentives
and accountability provides schools with the
opportunity to determine the most effective
combination of inputs and processes to achieve
established goals. Research on decentralization
in the Brazilian state of Minas Gerais has identified some modest but significant gains in learning and school retention associated with decentralization (Paes de Barros and Mendonca,1998).
Decentralization of management can go much
further. In the United States, the charter schools
movement frees public schools from bureaucratic rules and hands them over to nonprofit
boards or institutions. The board can exercise
complete freedom in choosing teachers, setting
up contracts and carrying out the school’s overall administration. More than a thousand such
schools are now in operation and more are being
established daily. While there is no conclusive
evaluation of the experiment, the results are
promising. In some cases, not enough time has
elapsed for results to become obvious; in others,
the results are inconclusive results. Of course,
the right amount of transparency, standards and
regulation is necessary for charter schools to
work.

In the United States, two recent cases illustrate
attempts at taking evaluation of school performance closer to the threat of “bankruptcy.” In
Florida, a recently established program provides
that students in schools that, during a four-year
period, receive a “failing” grade on standardized
tests can receive vouchers to attend the private
school of their choice. Recent studies reported
that under the threat of losing students, failing
schools achieved significant improvements in
average scores (see Kupermintz, 2001). In some
states, such as Maryland, New Jersey and New
York, state authorities have taken over locallyrun schools that failed to perform adequately. In
these cases the superintendent, the school principal and the teachers run the risk of losing their
jobs.

Payment by Results: Monetary Incentives
for Achieving Mandated Goals

In spite of the pitfalls and obstacles, progress has
been made in instituting systems to evaluate
teachers and administrators. These efforts must
be continued. To do so, it will be important that
teachers’ unions understand that a strong teacher
and school evaluation system will eventually
lead to greater professionalization and prestige
for all those involved in the teaching profession.

Entire public institutions can be financed on the
basis of the number of students they attract,
graduate, or place in the labor market. This approach is rare at the basic and secondary education level, but more common in vocational/technical and higher education. Chile has
experimented with a program by which the state
reimburses the costs of vocational training for
students who can be placed in stable employment. Colombia and Brazil are experimenting
with competitive funding for training programs
(Middleton, Ziderman, and van Adams, 1993).
In the Netherlands, technical schools receive a
standard operating budget which they are free to
allocate as they see fit. However, a fraction of
the total funds is distributed according to the

Decentralization
Many countries in the region are giving the
schools, especially school directors, more power
in the use of discretionary funds, thus giving the
school director the responsibility to invest in
areas considered important. It is difficult to
10

performance of the school. Some U.S. states use
the labor market performance of graduates as a
condition for allocating resources to vocational
schools. As noted earlier, schools and teachers
can receive monetary awards or salary increases
when students improve their performance.

GIVING “EXIT” AND VOICE TO
THE COMMUNITY AND PARENTS
In many cases there are no mechanisms to “exit”
from a particular public school. School choice is
one way of giving parents and students such
power. In most countries of the region, parents
may enroll their children in any school that has
openings. Middle-class parents know where the
better schools are and often line up hours or days
in advance to try to get their children into these
schools. This kind of choice should be encouraged. Choice also exists at the higher education
level where students are more mobile, provided
they pass the entrance exams. However, lowerincome families do not have the same types of
choices because of lack of alternatives. Many
poor students living in urban slums or rural areas
cannot afford the real or the opportunity costs of
a bus ride to a better school.

Outside Latin America higher education is usually financed through capitation systems in
which resources are distributed proportional to
the number of students. This system contrasts
with many public universities in Latin America
where payments are made on the basis of the
number of teachers hired irrespective of student
teacher ratios. The Netherlands and the U. S.
state of Florida have gone further and provide
funding to the universities on the basis of the
number of graduating students, thus encouraging
schools to graduate students in the shortest period of time. Expenses for a student who spends
a longer time in school must be covered by the
school or the student. Of course such an approach requires other kinds of regulation and
oversight, otherwise universities may eventually
be tempted to award diplomas with minimum
school attendance. In the United Kingdom, universities get a fixed budget and an additional
amount that is proportional to their performance
and to specific development projects.

Parents and students can also be afforded some
measure of power (“voice”) over the public education system if they are directly involved in
local or school decisions. In most localities in
the United States, local and/or regional school
boards are elected, have the power to allocate
budgetary resources and are able to select the
school superintendent. There are only a few
cases in Latin America (e.g., El Salvador, Minas
Gerais) of school boards that wield power at the
school level. But the fact that school board
members are elected locally does not guarantee a
good education. There are examples in the
United States where school boards have been
captured by special interests (e.g., left or right
wing political groups, creationists). Perhaps because central management of education in the
Latin America has been so poor, local control
and management by parents has had encouraging results (at least in the cases of El Salvador
and the Brazilian state of Minas Gerais).

Chile has developed a complex system for financing higher education. In addition to providing direct support to the top 25 universities, the
government provides student loans for attendance at these institutions on the basis of the
socioeconomic status of its students. In addition,
the institutions that attract students with the
highest scores in the university entrance examination also receive additional funding. Finally,
the government supports research on the basis of
open competition. The “matching funds” approach, a system whereby public or private institutions that obtain funds from private sources
have increased access to public funds, is widely
used in the United States. Many countries in
Latin America (e.g., Mexico, Brazil, Venezuela,
Colombia) use open and transparent competition
and quality reviews by peers to provide research
grants, scholarships and salary supplements for
teachers.

Parent-teacher associations (PTAs) are another,
usually more benign, form of parental involvement that have existed for decades in the region.
Most commonly, these associations serve a social role in the organization of festivities and
graduations. Sometimes they raise money for
school activities or even to finance renovations
or purchase learning materials. At their best,
PTAs can aid and support teachers and school
11

directors, and may hold them accountable,
sometimes even complaining to higher author ities or to the media when there is incompetence.
This proactive role of PTAs requires a relatively
sophisticated group of parents, which is often
lacking in poorer neighborhoods where parents
may be semiliterate and or have had negative
school experiences in their youth. In order to
make the best of existing parent-teacher associations, it is very important to train parents to
understand their potential influence on the educational process.

ductivity. A shift in this attitude has become recently apparent and businesses are beginning to
realize that the overall “teachability” of their
employees is of fundamental importance. Big
corporations in Latin America can play an important role in encouraging increased public investment in education, actively lobbying for improved quality, transparency, accountability and
continuity of educational policy.
Associations of industrialists in many countries
are now taking stands on issues of education and
training. For example, a recent national conference of industrialists and entrepreneurs in Peru
proposed increased public funding of education,
a new “social contract” with teachers and ni creased transparency, accountability and autonomy in education (IPAE, 2000).

A PTA tradition never existed in Minas Gerais.
Yet, a strong Secretary of Education created
parent and teachers boards with ample power to
influence the management of schools, including
choosing principals. The commitment to empowering parents was strong enough that the
schools received financial resources that were to
be spent by the school under the direction of the
PTA. The dynamic created by these policies,
including universal school assessments, appears
to be correlated with Minas Gerais’ recent high
scores in national standardized tests.

CHARGING THE CLIENT:
COST-RECOVERY WITH
DIFFERENT NAMES
Although it is well understood that charging the
client for a service, even on a subsidized basis,
results in increased client pressure for quality
and cost-effectiveness, there are strong arguments against significant levels of cost recovery
for basic education. Any charge for basic education will discourage attendance by some of the
poorer students. A system of tuition for those
who can afford it and scholarships for the poor
at this level is cumbersome and the same result
could be obtained by means of a progressive tax
system.

GIVING VOICE TO BUSINESS
If businesses are major consumers of the
schools’ products, and the products are unsatisfactory, why do they remain silent? Companies
can prod the public system; they can complain;
they can lobby the government and they know
how to do this. In the United States, companies
such as IBM and Xerox recently announced a
policy of reviewing students’ grades before hiring them. The president of IBM organized a national roundtable and has been writing instit utional advertisements supporting school testing
and assessment. This is a potential incentive to
students to take their academic work more seriously.

At higher levels of education, however, cost recovery can be better justified. In the case of
higher education and some vocational training,
the goal of education is not universal enrollment
and basic learning (such as functional literacy
and citizenship). In addition, the benefits of education are more immediately obvious and they
accrue directly to students in the form of higher
salaries. In public tertiary education, therefore,
cost recovery can be a major tool to improve
governance and efficiency, since paying students
will demand more from their schools. They are
less likely to stay quiet when the quality of
teaching falls or when course offerings do not
respond to market demand, resulting in saturated
markets and inefficiency in general. If students

Yet, for a very long time, except for selected
support of private higher education institutions
and for vocational/technical training, businesses
in Latin America has taken a back seat in the
education debate, especially with regard to primary and secondary education. At times they
have expressed regret regarding the poor quality
of education, but they are often not even aware
that poorly educated students hurt business pro12

perceive that the value of schooling in the labor
market is less than the cost of tuition and foregone income, they are likely to drop out and enter the labor market immediately. In addition,
cost recovery in higher education can free up
funds to invest in the lower levels of education.
The problem of equity can be met by charging
students who are able to pay and establishing
loans and scholarships for the need. But it
should be noted that running a good student loan
scheme with adequate repayment ratios requires
a strong, independent agency with well-trained
and remunerated staff.

of this approach varies greatly depending on
internal incentives as well as market conditions.
There is far more “informal” cost recovery at all
levels of education in Latin America than is often recognized, and more than likely, these payments exert some pressure on public schools to
perform more effectively. A recent study of
Peru, for example, found that parents in primary
and secondary schools paid a significant amount
of the costs of schooling, equivalent to US$33
per year for the poorest families and US$73 for
families in the highest income quintile (World
Bank, 1999).6 According to Carnoy and Torres
(1994), budget cuts in the late 1980s and early
1990s often resulted in an increase in the share
of costs paid for by students. Countries and regions with strong communitarian traditions have
relied on the parent-teacher associations to collect funds, which were usually provided on a
voluntary basis. These contributions often paid
for supplies (such as books), maintenance,
equipment, and even the salary of additional
staff. However, in most cases, these contrib utions were insufficient to pay the salaries of
teachers. At the tertiary level, schools may
charge laboratory, library, testing, and parking
fees.

Officially mandated cost recovery in public
higher or upper secondary education in the region is an explosive political issue. Nevertheless, some countries, notably Chile, Argentina,
Mexico (outside of the UNAM), Venezuela (in
only one public university) and a few Brazilian
states have experimented with different types of
cost recovery. Current legislation and the constitutions of many countries make “official”
cost-recovery in public education virtually impossible. At the same time many public higher
education institutions are seeking private funding for contractual training services. The success

6

This is common throughout the developing world.
See for example work by Tsang (1999) on Thailand
and Pakistan.
13

Encouraging Private Schools to Serve Public Objectives
quences of a deficient education can only be felt
in the long run. This creates a strong temptation
to cut corners (or even to defraud students) by
providing "credentials" that lack real learning or
competence. Without careful quality control,
private institutions can be tempted to become socalled “diploma mills,” producing credentials
rather than adequately trained and educated individuals. Also the desire for profit may well
lead to the opposite of innovation, as private
schools seek the least cost means of meeting
credentialing requirements. In short, in order to
serve the public good, private schools must be
properly regulated. The next section summarizes
the alternatives for oversight and regulation,
followed by an argument and options for public
support of private education.

BEHAVIOR IN PRIVATE SCHOOLS
Private schools are, in principle, more efficient
than public schools because they must balance
their budgets at the end of the month and have
greater administrative flexibility. As noted earlier, the gains are often modest; in higher education, the gains in efficiency can be signif icant.
The private system also, in principle, offers a
variety of alternatives that could not be offered
in a publicly-funded institution or might not be
appropriate to offer there. Because they are selfgoverning, private schools better reflect the
preferences of parents and students. Private
schools meet social needs when they bridge gaps
left by the public education system, whether by
catering to special-needs populations or providing education geared to particular preferences.
The latter include, for instance, religiouslyaffiliated schools (Protestant, Jewish, Catholic),
schools that emphasize values that do not represent the national average (such as schools at either end of the liberal/conservative spectrum),
and Steiner or Montessori schools. Because private schools vary greatly, in principle they have
more leeway to explore different paths and test
new ideas.

TOWARDS INTELLIGENT OVERSIGHT
OF THE PRIVATE SECTOR
There is no such a thing as a completely free
market, without rules or regulations. Modern
states regulate against monopolies, enact laws to
ensure environmental protection, enforce sanitation and health codes, protect against false advertising, require minimal fiscal and accounting
practices, define ISO standards, etc. Education is
no different. Regulations, if they are not well
conceived or executed, can also impede creativity, competition and development. This section
summarizes some of the options for public oversight of private education. Recently prepared
case studies on Guatemala, Brazil, Colombia,
and Argentina suggest that much of the state’s
oversight is counterproductive, often encouraging low quality and monopolistic tendencies
(Sorj, Lavarreda, Vergara, Morduchowicz,
2001).

Private institutions are not without their shortcomings. Indeed, one of the most insidious is the
fact that although a deficient private school can
inflict serious damage on its students’ future
prospects, the situation is difficult to detect and
difficult to correct. When a student performs
poorly, it might not be clear whether that performance is due to poor teaching or the student’s
own lack of commitment or ability. There are no
clear definitions of what a “good quality” education is, whether in the private or public sector,
especially when one takes into account the abilities or previous learning of students and tries to
measure “value added.” Further, the conse-

The principles of oversight and incentives for
private education are no different than those for
public institutions, although specific applications
14

may differ. In particular, there is a need for market information, evaluation and rewards for good
performance and allowing prices to affect decision making.

countries, bureaucratic constraints mean that it
can often take years to obtain authorization to
open a private school. However, these barriers to
entry into the education market do not ensure the
quality of the approved institutions and can lead
to the creation of semi-monopolies for already
approved private and public schools. As is the
case in other industries where a few firms control the market, private education associations
can often be the most enthusiastic proponents of
strict barriers to entry that allow them to maintain their semi-monopoly status

Market Information
The needs for consumer and market information
are the same in private as in public institutions.
To meet this need, governments need to require
and/or encourage private institutions to divulge
standard indicators, such as scores on achievement tests, dropout and flow rates and teacher
qualifications. Dropout rates are particularly important because private schools, especially correspondence schools, have been known to advertise extensively, to collect tuition payments in
advance, and encourage or condone dropping
out. Many private institutions consider detailed
financial information to be proprietary. Nevertheless, at the least, private educational instit utions should be required to regularly provide
information on tuition and fees.

A more constructive approach is a two-stage
accreditation procedure. The first stage, which
would be completed within a relatively short
period of time, would entail minimum requirements for an institution to operate, that is, an
assessment of physical facilities and staff credentials. The second stage would involve a more
rigorous evaluation that could be used to make
institutions eligible for public subsidies, such as
vouchers or student loans. This more thorough
evaluation would examine, for example, library
and laboratory facilities and use, teaching qualifications and conditions, and management and
organization.

El Salvador began development of a system of
higher education evaluation and accreditation in
1997 (Bernasconi, 2001). As a result of the program, several private institutions have closed
their doors and others have sought to raise standards. The publication of rankings appears to
have increased competition and improved the
quality of the teaching staff, libraries and
equipment.

A particular aspect of private school regulation
involves so-called “truth in advertising” laws.
As is the case with other advertisers, private
schools must also deliver what they promise. For
example, a technical school might advertise that
90 percent of its graduates are placed in information technology jobs or a secondary school
might advertise that 90 percent of its graduates
are accepted into elite higher education instit utions. In both cases, the schools must make the
statistics available to back up their claims. A
number of private proprietary as well as nonprofit institutions in the United States have been
cited for false and misleading advertising. But
consumer protection in the region has rarely focussed on advertising in education.

Another recent example of the impact of making
information about test results publicly available
is Brazil’s experience with the Provão, a national test given during the last semester before
graduation in all higher education institutions in
specific areas (e.g., law, education, medicine,
etc.). It is reported that three fourths of the private higher education institutions have responded to the test by improving the quality of
their teaching staff.

An alternative to rigid public regulation is the
creation of voluntary associations of private
education institutions, a common tradition in
Anglo-Saxon countries. Accreditation committees composed of educators and community
leaders undertake periodic evaluation visits to
assess the institution’s strengths and weaknesses

Evaluation, Accreditation and Regulation
In the private as well as the public sector, performance evaluations are very important. In the
case of private schools, the evaluation process
begins with the issuance of permits or “author ization” to operate a school. In a number of
15

and renew (or not) its accreditation. Although
associations of this type exist in Latin America,
they tend to do a better job as interest groups
than as arbiters of institutional and educational
quality.

dary or higher education for financial reasons (in
other words, for equity considerations); d) to
support technical or professional training in areas where the pay is not sufficient to attract the
best students (examples are certain industrial
technicians, teachers and middle-level health
professional and technicians); e) to support the
production of public goods, such as basic or precompetitive research; and f) to encourage the
dissemination of new ideas, approaches, and
technologies. At the same time, public financing,
without appropriate oversight and accountability, can sometimes encourage in private institutions the very elements of inefficiency often associated with public institutions and can
heighten inequities. Recent studies of Argentina
and Peru have shown that public subsidies of
private schools can be based on out of date considerations and influenced by lobbies, resulting
in increased inequity (Morduchowitz, 2001; Navarro, 2001).

Price Controls: A Bad Idea
Price controls are a private sector oversight
mechanism often used in the region (see, for
example, Vergara 2001, on Colombia, and
Lavarrreda, 2001, on Guatemala). However,
price controls are highly counterproductive since
they defeat the purpose of price signals as a
means of ensuring economic efficiency. When
price controls are set too low, schools are forced
to cut corners and discouraged from expanding;
they could even be encouraged to shift their focus to other levels or move to other regions. Anecdotal evidence also shows that, in some cases,
institutions operating under these conditions
may create a â&#x20AC;&#x153;black marketâ&#x20AC;? in additional fees.
When prices are set too high, private school operators are able to increase their profits. The rationale behind price controls is that private
schools operate in a semi-monopolistic market.
If this is the case, then the best public policy
would be to encourage increased entry into the
market (e.g., quick accreditation), as well as to
publicize objective information on school quality.

In principle the objectives of high quality public
education and encouragement of expansion of
private education are not contradictory obje ctives, but, with the right policy framework, are
self-reinforcing. But the region already suffers
from the impression of low quality public education for the poor and lower middle classes;
and higher quality private education for the middle and upper classes. Therefore policies for
public support of private education must at the
least not appear to be done at the expense of the
quality of public education.

PUBLIC FINANCING OF
PRIVATE SCHOOLS
TO ACHIEVE PUBLIC POLICY GOALS

With regard to least cost use of public funds, the
case of secondary education is illustrative. A
recent study (Wolff, 2000), estimated the costs
of reaching secondary education enrollment targets by the year 2010 at $11 billion in capital
costs and over $5 billion in annual increased
recurrent costs. The public sector in principle
could fully cover these costs if real GNP per
capita grew at 3 percent per year. But encouraging the private sector to meet a significant
portion of these needs will free up government
funds for other basic needs and provide a margin
of safety if GNP per capita growth is inadequate.

Why Public Support of Private Schools
Education is a quasi-public good because benefits accrue to society as a whole, as well as to the
individual student. Hence, there are good reasons to use public funding to support private
education. Among the reasons for subsidizing
private education are: a) to support the expansion of education and training at a lower cost
than establishing new public institutions or expanding existing ones, especially in the face of
serious budgetary constraints; b) to encourage
diversity and competition through increasing the
opportunities for choice; c) to help to target poor
students in basic education or to ensure that
worthy students are not denied access to secon-

In countries recently beset by civil disturbances,
such as Haiti, Guatemala, and El Salvador, the
private sector expanded rapidly, even at the ba16

sic education level, in the absence of government authority and financing. The challenge, as
civil authority has been restored, is to build on
this existing private infrastructure rather than to
ignore or seek to destroy it.

by amortization and depleted by new loans, including the problem of collecting debt after
graduation. A wide variety of approaches
throughout the world have been taken to increase repayment of student loans.

The state has a variety of options at its disposal
to support private education for public purposes.
The following sections outline some of these
options, and how they might be used to serve
public policies of lower cost expansion, diversity
and choice, equity, quality, support for critical
occupations, public goods such as research, and
dissemination of new knowledge.

The Pan-American Association of Student
Credit Institutions (APICE), an organization of
over 30 student loan organizations, both public
and private, in the region, has analyzed best
practice in the management and provision of
student loans, and has reported significant
growth as well as improvements in the region
over the last decade (see Tellez and Orostegui,
2001). The United States, with a vast system of
student loans and varying subsidies depending
on the student’s financial needs, recently reported the lowest default rate (6.9 percent) in the
history of the program. 7 The United States has
established a secondary market (the Student
Loan Marketing Association, or “Sallie Mae”)
for student loans, thus spreading the risk to individual lenders.

Scholarships, Loans and Vouchers
Publicly provided scholarships can be used for
equity purposes, to ensure that needy but qualified youth are able to continue their schooling.
They are used mainly at the higher and graduate
education level, but have been used in some
cases for private upper secondary and technical
education. Scholarships can be an effective
“neutral” means of leveraging public funds,
since they can be distributed in an individual
basis, giving the right to attend any school. Often they are granted to institutions of learning
that themselves choose students to whom to
concede the scholarships. In this case they can
be used also to as an accrediting mechanism to
encourage increased quality by setting a threshold for eligibility to receive funds. Scholarships
require a reasonably effective system for identifying financial need. In most countries in Latin
America, the taxation reporting system is now
robust enough to permit this kind of identific ation.

Vouchers, the idea of granting students a coupon
to exchange for education, are associated with
Milton Friedman, the indefatigable defender of
markets and private initiatives. Vouchers are
basically portable scholarships provided to the
student or his parent and are usually considered
at the primary and secondary levels. By using
“consumer choice,” the voucher scheme in principle helps to ensure that only the private institutions which provide the highest value added to
students are able to flourish. Vouchers in the
United States, some of which go to religiously
oriented schools, are the subject of strong debate, especially because of the long tradition of
separation of church and state.

Similar in function to scholarships are subsidized student loans for students. Capital markets
are usually inadequate to support loans of this
sort, since the only “collateral” is the individual
himself (rather than, for example, property). Under this mechanism, students borrow to finance
their education. These credits can serve to pay
monthly fees or sustain the student during the
studies. There are scores of student loan
schemes throughout the world (Albrecht and
Ziderman, 1993). Student loan schemes are
more complicated than scholarships because of
the need to manage a revolving fund, increased

Beginning in 1992 Colombia implemented a
voucher program, targeted at more than 100,000
students, and designed to provide additional
places in private secondary schools. An evaluation of the program (King et. al.) concluded that
the program successfully provided additional
places to needy students at about 77 percent of
the unit costs for public education. However the
program had a number of difficulties in timing,
7

disbursement, and monitoring, it was not clear
whether there was truly a net increase in enrollment through the program and there were concerns about the quality of recently established
private schools. In the absence of strong public
support the program has since ended.

Direct or Contractual Public Support
of Private Schools
The advantage of contractual arrangements is
that the state can terminate support if schools
fail to deliver quality education. Of course careful and powerful oversight is required to ensure
that these institutions do provide the education
that they promise. In Latin America, the most
widespread example of contracting for services
is the Fé y Alegría school system, which enrolls
over one million students in 14 countries in the
region and is an example of a private institution
serving public policies directed toward equity,
quality and lower cost. Fé y Alegría schools are
run by a nonprofit church-affiliated organization, restricted to poor areas. The state pays the
costs of teachers, who are public employees.
Recent evaluations have suggested that Fé y
Alegría schools cost less and have better results
than public schools located in similar neighborhoods (Swope and Latorre, 1998, and Navarro
and de la Cruz, 1998). The public good is served
by encouraging efficiency as well as restricting
such support to schools serving special or disadvantaged clienteles. Based on the problems encountered with vouchers described above, the
city of Bogota, Colombia, recently established
similar arrangements with private institutions
serving slum neighborhoods (Vergara, 2001).

Over the past 15 years Chile has implemented a
system under which parents do not actually receive a “coupon” but do have access to private
schools (primary, secondary, and the last year of
pre-school) which are financed by the state on
the basis of enrollments. Chile now has three
education networks: fully private, enrolling 9
percent; private subsidized by the state, 35 percent (including technical/vocational institutions);
and municipal, 56 percent. The introduction of
the system resulted in a surge in private highly
subsidized schools. The purely private schools
are the traditional schools of the middle class
and the elite.
The great risk of the voucher system is what it
leaves behind. Private schools financed by the
voucher system attract the best of the public
schools, including middle class families with an
awareness of school quality and greater financial
ability move around the system, thus creating a
problem for those schools such as, in Chile, the
public municipal schools, that lose the “good”
students. Chile’s scheme has been evaluated by
a number of researchers (Mizala and Romaguera, 2000; Carnoy, 1998; McEwan, 2000).
There appear to be some gains in efficiency although there continues to be a problem of
“skimming.”

In many countries in the region (e.g., Bolivia,
Ecuador, Colombia), Governments contract with
NGO’s and community associations to provide
early childhood development services to at risk
clienteles (Myers, 1996). These programs usually cost less than publicly provided preschooling which may use an excessively academic model. However it is important to ensure
that the quality of these programs, especially in
terms of trained staff, is adequate to have positive developmental results. Several Governments, with multilateral assistance, has been
providing training to communal and NGO staff.

To encourage private schools to meet public
goals, loans, scholarships, and vouchers can be
used to encourage quality improvement in pr ivate institutions, by insisting that institutions
meet minimum standards before they are eligible
for such financing. To encourage internal efficiency, they can also terminate after the student
attends a fixed number of years. They can be
targeted towards areas considered of greatest
social need, such as teacher education or training
public health workers.

Chile treats some of its best private universities
as public institutions. The Catholic University of
Santiago is such an example, garnering similar

18

financing arrangements as that of the public
University of Chile. For a period in the 1960’s
the Brazilian federal government partially supported private universities, and Colombia continues to subsidize a few private Catholic universities.

tional lenders are wary because of uncertainties
brought about by price controls as well as a
changeable market and a difficult to measure
product. Yet better access to capital may well be
a very inexpensive way of encouraging private
education development. Recognizing this problem, Brazil’s Banco Nacional de Desenvolvimento Economico y Social (BNDES), with
IDB support, has established a special program
of support for capital improvements in both
public and private higher education (see
BNDES, 1999). One approach to evaluating requests for financing would be to take a purely
financial criteria—is there a high probability that
the institution will pay back the loan? Another
approach would be to use such loans to encourage increased quality, through defining a min imum set of teacher, curriculum, or physical facility specifications, or even restricting lending
to certain high demand occupations. The second
approach, while on its face preferable, runs a
risk of bureaucratizing the entire process. In fact,
the program in Brazil is reportedly having some
difficulty moving forward because of requirements to provide detailed financial and pedagogical information to the Ministry of Education
as a prerequisite to received funding. In princ iple similar programs of capital investment can
be directed towards primary, secondary, and
technical education.

In much of Latin America, as in the United
States, direct contracting, especially with religiously oriented institutions, is politically and
historically difficult. In Brazil, for instance,
long-standing clashes among the defenders of
lay and religious schools make direct payments
to private religious schools currently politically
impossible.
Competitive Funding
Competitive funding is common in vocational/technical training and in graduate education and research. Chile has experimented with a
program by which the state requests proposals
and then contracts with public or private instit utions for vocational training for students who
could be placed in stable employment. Colombia
and Brazil are experimenting with competitive
funding of training programs outside of the cla ssical SENAI and SENA systems (Middleton,
Ziderman and van Adams, 1993). In graduate
education and research in many countries in the
region (e.g., Venezuela, Mexico, Brazil and
Chile) funds are allocated on the basis of open
peer reviewed competition (IDB, 2001). In both
cases the state is seeking the most efficient and
highest quality provider of a service it considers
important, such as training or research, be it a
public or a private institution, and the private
and public receive the same treatment. Yet, it
should be pointed out that the ability to present
good proposals often depends on the existence
of an education and/or research infrastructure
that in many cases is difficult to achieve without
public funding.

Tax Incentives

Access to Capital Markets

A wide variety of tax incentives for private education are possible in the region and elsewhere.
In the first place most, but not all, private institutions are nonprofit, and therefore do not pay
taxes on any profit. Instead, any excess of revenue over expenditure is put into the institution’s
reserves. This exemption can be abused when
private institutions pay very high salaries to its
administrators as well as to relatives of administrators. In Latin America nonprofit schools are
often exempt from value added taxes or import
duties.

One of the main impediments to entry into the
private education market is a lack of access to
capital markets for school construction and
equipment. This is in part a problem of the overall weakness of capital markets in the region. In
addition, education may be an area where tradi-

The United States has developed a variety of tax
incentives to individuals who pay for private
education. These include: a) up to a certain income level, a tax deduction to cover the partial
cost of attending higher education institutions;
b) permission to use individual pension accounts
19

(IRAs) for educational expenditures, before retirement age, without penalties; c) exemption
from the annual $10,000 limit for gift taxes for
payment of educational expenses of third parties; d) deductions from gross income of charitable donations; and e) most recently, setting up of
tax free investment accounts to finance the costs
of future private school attendance. These deductions and tax preferences can be important
since the top income tax rate is 39 percent. One
advantage of these incentives is that are “neutral,” permitting full choice of educational institutions by individuals and in theory encouraging
diversity. The disadvantage is that they are middle class subsidies. A number of these incentives
exist in Latin America but have a much lower
impact or visibility since tax rates are lower and
fewer individuals actually pay taxes.

with changes in their field and that there is a
public interest in increasing their productivity.
Surprisingly, there is no such attitude towards
“small and medium” education enterprises,
which may also find it difficult to assimilate best
practices also, especially at the secondary, technical, and higher education level. After all, if
private (or public) institutions are teaching that
the earth is flat, or are unaware of latest approaches to information technology (or more
controversially might argue that Marxism is the
driving force in economic change), then there is
a public interest in supporting better knowledge
and more effective teaching (see Castro and Navarro, 1999). For this reason, this paper supports
a new idea: a training and extension service to
private institutions, especially at technical and
higher levels, but equally open to public institutions, to introduce new ideas and technologies.
For this service to operate effectively it should
be privately operated but jointly supported by
government and the private sector, not unlike
institutions which support innovation in areas as
varied as agriculture, fisheries, the shoe industry,
electronics, etc. This support could be of particular importance in the area of distance education.

Technical Assistance and Advice
on Best Practices
Throughout the region governments have developed programs of support, in the form of training and provision of up-to-date information to
small and medium size productive enterprises.
The assumption is that these enterprises do not
have the human or financial means to keep up

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Postscript: Public or Private, a False Question
Private or public, this is a false question. This is
old ideological battle, a carry over from the past.
The epic clash between those seeking to privatize and those seeking to nationalize has dragged
for too longâ&#x20AC;&#x201D;in particular, in relation to education. We need both, public education with pr ivate efficiency and private education fulfilling
social goals. Wild capitalism and unresponsive
civil service must be considered as equal candidates to the trash bin of history. The distinction
between private and public is less important
than the perceived public good of each set of
institutions, and the rules of the game to which
critical actors of the system respond. Furthermore with the right policy framework, there is
no contradiction between high quality public
education and encouragement of expansion of
private education. The greatest obstacle to ef-

fective public education is the lack of appropriate incentives. The greatest obstacle to private
solutions which serve the public good is the incapacity of the state to design and implement an
environment and appropriate incentives where
the private gain more when they behave in ways
that promote public interest. To improve, both
public and private education require clear and
coherent standards, the means to achieve those
standards, and feedback on how well they are
doing.
The challenge for the modern Latin American
state is to abandon its role as operator and learn
to exert itself in a normative function, as an intelligent overseer and controller. This is as important for education as it is for telecommunic ations.